If Scotland votes for independence, it would not be a “game changer” for the UK’s credit rating, according to a Fitch credit analyst
Speaking at the TwentyFour Investment Conference last week, Fitch’s Douglas Renwick said that although Scottish independence would create risks for the rest of the UK’s rating, the threats were only likely to be “moderate”.
He also said it was impossible to predict what credit rating an independent Scotland would be awarded because of the large number of uncertainties, such as its subsequent macro policy and the question of what will happen to the UK’s debt.
Mr Renwick said the question of debt levels was the main risk to the UK’s credit rating if Scotland leaves.
He pointed out that when Fitch downgraded the UK from an AAA rating to AA+ in 2013, an important criterion considered was the level of public debt, both the current level and the projected rise.
Since the downgrade, the renewed strength of the UK economy has led to a reduction in the projected rise of UK debt, but the figure could increase significantly if Scotland leaves.
Mr Renwick said the Treasury had already issued a statement reassuring gilt investors there would be no change to their investments if Scotland votes ‘Yes’.
He said this indicates the total gross stock of debt would stay in the UK, but said “you would assume it would be offset by a bilateral loan from Scotland to the UK” to effectively pay for their portion of the debt.
The upshot of this would be that the UK’s level of gross domestic product (GDP) would overnight shrink by 10 per cent, but its level of debt would remain the same.
This would push the UK’s level of debt to GDP back into worrying territory and Mr Renwick said Fitch would see that as a negative for the UK and its credit rating.
It would also mean that the UK would have a “large exposure to Scotland”, said Mr Renwick, because it would be reliant on Scotland to honour its side of a “bilateral loan” and pay for its portion of the debt.
Mr Renwick added that the “bilateral loan” would carry Scottish credit risk, although it is still unclear what sort of risk that would entail.
However, the Fitch analyst said all of this was “still just a moderate increase in public debt” and was “not a complete game changer [for the UK’s rating], especially with the UK recovery”.
Scotland faces several issues to clear up when it comes to its credit rating if it votes for independence, including having no track record as a sovereign borrower. There are also questions surrounding the dividing up of oil revenues and its choice of currency.
Mr Renwick said if the division of oilfields was done purely on a geographical basis, then the “lion’s share” would go to Scotland. While this would boost Scotland’s economy, Mr Renwick said it would increase the country’s commodity dependence, which would lead to more macro economic volatility.
And with Scotland joining the euro “not a near-term” option, Mr Renwick said there will be issues over whether Scotland will adopt a floating currency or one with a peg.
But he said a currency union with the rest of the UK would be “asymmetric” and it is unclear “how risks will be shared”.
